Check fraud has been a problem for both financial institutions and retailers for decades, and the incidence involving check fraud has been on the increase for the last several years. Whenever a person forges a check on an account, one type of potential check fraud occurs. The person either makes the forged check payable to himself or a fictitious payee. The person then tenders the check to a retailer, perhaps in payment for goods or services received and perhaps with a request for cash. Alternatively, the person may tender the check directly to an FI (a "presenting FI") in the form of a deposit with a simultaneous request for cash (by means of the "less cash" field present on conventional deposit slips, such fraud being commonly called "less cash" fraud). Either way, the check ends up at a presenting FI, which, in the usual course of business, must determine (among other things) whether the check is genuine. Even with today's sophisticated presentment systems, this process can take precious days.
If the presenting FI finds the check to be a forgery, the retailer or the FI may take harsh measures against the person, if he can be found. The immediate victim in this scenario is, of course, the retailer or the presenting FI to which the check is originally tendered, and the cost to the retailer or presenting FI is the amount of the fraudulent check. The cost of such fraud is typically passed on in the form of increased prices to customers in general, who collectively then become the ultimate victims.
Both civil and criminal enforcement against fraudulent check writers are, unfortunately, difficult and most often will not lead to complete financial restoration. Habitual fraudulent check writers are difficult for the authorities to apprehend, because they can easily move from one geographical location to another and successfully evade the authorities while continuing to write fraudulent checks. Even when apprehended, however, they are usually financially incapable of making full financial restitution.
In an attempt to mitigate the problem of fraudulent check writers, retailers and FIs, in the past, have often relied on the "best judgment" of their cashiers or store managers, who examined photo ID cards, such as driver's licenses, and evaluated checks against an established local procedures. This process, however, has been only minimally effective and does not alert the retailers to the more sophisticated fraudulent check writers.
Additionally, retailers have turned to check-guarantee companies. Guarantee companies typically reimburse retailers if an approved check is returned for fraudulent reasons and also takes on the obligation of collecting the funds from the person who has forged the check. While these companies do protect the retailers from the financial risk, their services are costly, and again this cost is typically passed on to the consumers through increased prices for goods or services.
To overcome these deficiencies, check authorization networks ("CAN") have been formed in which retailers share information on returned checks and closed checking accounts. These systems may further incorporate information from a financial institution's database that is manually input into the CAN system. Typically, a retailer, who is a member of CAN is provided a host computer terminal for entry of returned check information or uses a host to host connection. A CAN master computer system retrieves that information from the retailer's computer terminal or host, adds or deletes checking account and driver's license numbers from the CAN master database and may redistribute the updated information to the retailer's computer systems for point-of-sale ("POS") access, retailers can select either national or regional database access.
The retailer's host computer is accessed through its POS terminals. Daily, the CAN master computer sends the retailer updates about fraudulent and returned check accounts that were received by other retailers. The retailer, in turn, uploads information concerning the returned checks it has received into the CAN master computer system, which, in turn, is distributed to or accessible by other retailers, who participate in the system. The type of information that is available with respect to the check may vary from one system to another. However, the more salient information typically includes the payor's name, address, driver's license number, social security number, and FI, account number and reason for inclusion on the file.
When a retailer or FI accepts a check from a person, the payor's checking account and/or driver's license number is provided to the POS terminal for verification purposes. If the person has an outstanding returned check, the retailer receives a decline code. It is then the person's obligation to contact someone within the check authorization network to remedy the problem. Once all outstanding returned checks have been paid by the person to the various payees, the CAN's master computer is updated with this information and downloaded to the retailer's host computer. After the updated information is downloaded and made accessible by the POS terminals, the payor's checks may then be accepted at various point-of-sale terminals.
The check authorizations networks, as just generally discussed, are very effective in deterring fraudulent check writing. However, there are certain areas in which it is desirable to make these systems even more efficient and effective.